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Ask CryptoVantage: What is Real Yield?

DeFi and the broader cryptocurrency industry have taken it in the teeth for the latter half of 2022. The collapse of the Terra ecosystem and the contagion from the Celsius platform collapse and FTX have left the DeFi space bloodied and tagged as untrustworthy. A little ironic considering the underlying technology is supposed to create a trustless system. DeFi projects have been declared nothing more than Ponzinomics. Most retail investors burned in 2022 have moved on or are hesitant to re-enter the DeFi landscape.

High-yield APY protocols in early 2022 promised to challenge traditional financial infrastructure with significantly higher returns. Some protocols, like Terra’s Anchor protocol, were claiming to give 20% APY. Unfortunately, when something appears too good to be true, it often is.

DeFi’s landscape was built on a house of cards. Most high-yield APY protocols borrowed against other DeFi protocols and were underpinned by nothing more than the valuation of their native governance tokens. This was a deadly combination and led to the collapse of many DeFi projects. Yet DeFi is not entirely dead.

Quietly over the last six months, a new protocol has emerged from the ashes, one that promises to be less exciting but more sustainable over the long term. Enter Real Yield protocols.

Where have all the yields gone?

So, What is Real Yield?

The concept is much like a dividend in traditional stocks. A DeFi project will share the revenue they generate with the stakeholders (holders of the protocol’s governance token). However, unlike previous DeFi projects with high APYs that were distributed in the native project token, Real Yield distributes revenue denominated in a mainstream asset like ETH or USDC.

This is an important distinction between the high-return DeFi protocols that we saw in early 2022 and what is emerging around Real Yield. For one, holders of the governance token are more welcoming of returns in a more mainstream asset like ETH or USDC.

Stablecoins like USDC are pegged to the value of a fiat currency like the U.S dollar. These have proven to be more stable when compared to most cryptocurrencies, which have fallen around 80% from hitting their ATHs last year.

Earlier in the year, the high-yield APY protocols generated their revenue from marketing and token emissions. In comparison, Real Yield generates its distributed revenue through interest on loans, gas fees, and trading fees on DEXs. This creates a more sustainable model which allows protocols to pass on revenue to their native governance token holders. Users won’t see astronomical returns similar to what occurred in the past, but the returns will still be higher than in traditional finance.

Potential Issues

Redacted Cartel is one example of a Real Yield protocol. Its co-founder, 0xSami published an article in August 2022 that identified two main areas of concern for projects that optimize for Real Yield.

Empty Governance Tokens

The first issue 0xSami identifies in projects that overtly market themselves as Real Yield is that they can generate new governance tokens to attract revenue-generating capital. The focus on marketing and generation of new native tokens was how earlier high-yield APY protocols ended up with an unsustainable model.

The crypto industry tends to snowball new trends. If Real Yield becomes hyper-popularized, smaller projects could easily balloon beyond their ability to generate organic growth to maintain Real Yield payouts. In turn, the returns could become so insignificant that investors stop staking the native token.

No Such Thing As Guaranteed Returns

In addition, projects with guaranteed returns, even in the low-digit range, could quickly run out of capital if the protocol grows too big and too quick to cover the Real Yield payments from generated revenue. This could lead to withdrawing governance tokens from the earlier stakers.

If early investors sell off, users attracted to Real Yield as a “safer” alternative could be left holding staked governance tokens as they watch the price tank. This loss in value could cost more than the Real Yield they generated during the lock-up period.

Reserves are Better Kept in-House

Another potential issue in Real Yield is the sustainability of early-stage growth companies. New emerging protocols will need to focus on growth and building up their treasuries. By splitting revenue generated with stakers of the native token, protocols will not grow as quickly. 0xSami notes, “Keeping the money in-house to retain talent and fund new developments will serve your community better in the long term“.

Real Yield is Promising But Remain Vigilant

Understandably many users are hesitant to get back into the DeFi waters after the carnage unleashed earlier in the year. Even then, Real Yield protocols may offer a softer re-entry point. Moreover, a more sustainable model that ties the success of these protocols to the yield generated will hopefully lead to a more sustainable ecosystem, overall.

However, whenever a new protocol metric comes with potential, people will inevitably seek to use it as a marketing tool for short-term gains. Umami Labs is another Real Yield protocol currently in the crypto ecosystem. Its CEO Alex O’Donnell sees massive potential in Real Yield but cautions people against investing in novel or nascent protocols. “It’s a question of getting around the smoke and mirrors before scams come in and rug retail again“.

If you’re interested in learning about Real Yield than you might want to research some of the early competitors in the space including the aforementioned Umami Labs as well as, and Synthetix and Gains Network but be warned it’s still extremely early.

Real Yield protocols may be the future of DeFi, but if the last year has taught the crypto community anything, it’s to remain vigilant and always do your own research before investing. There is great potential for stable returns but also great potential for the next Terra ecosystem collapse.

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Iain Taylor

About the Author

Iain Taylor

Iain Taylor grew up in Northern Ireland, and is currently living in Halifax, NS. He has quadruple citizenship status, and has been involved in cryptocurrency since the end of 2020. He completed a study in Bitcoin, Blockchain Technology, and Cryptocurrencies at Dalhousie in 2021, and has been writing on the industry since September 2021.

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